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Governmental intervention is essential to combat environmental pollution, a phenomenon classically explained as market failure, while market-based environmental policy instruments have provided cost-effective alternatives. By examining five pilot air pollution (sulfur dioxide) and water pollution (chemical oxygen demand) trading schemes in China through a market-based theoretical framework and extensive empirical analysis, this research analyzes where a state-market boundary is defined, whether the market is performing effectively, and, critically, what leads to underperformance. Constrained by policy design, policy conflicts, and excessive state intervention, the market has not played an effective and ‘decisive’ role, resulting in low market thickness for participants and transactions, market congestion on prices, and inadequate market safety for genuine emissions trading. Better emissions trading for conventional pollutants and CO2requires better market-oriented rules, improved policy coordination, and stronger implementation while minimizing state intervention. [ABSTRACT FROM AUTHOR]

Eco-compensation for watershed services (EWS), or the more general payments for ecosystem services, is an incentive-based environmental policy instrument. With official documents and first-hand data from fieldwork, we analyze China’s 17 EWS pilot schemes across 16 provinces. Major environmental crises in China can partly be caused by the inadequate incentives for local governments to forcefully implement the environmental laws and policies. EWS schemes in China mainly target local governments in upstream and downstream watersheds, rather than the private entities in normal applications elsewhere, to provide economic incentives and to encourage their enforcement activities. [ABSTRACT FROM PUBLISHER]